September 2013

MAC Economic Commentary

Miners put energy into renewable power

By
Brendan Marshall

Renewable technologies and the economics of their deployment have improved and will likely continue to do so. Renewable power is appealing to miners
because it has the potential to reduce energy costs and environmental impacts while enhancing energy security and strengthening a company’s privilege to
operate in communities.

Rising energy costs have increased miners’ focus on energy efficiency. The Canadian Industrial Energy End-Use Data and Analysis Centre’s Energy Use and
Related Data report in 2012 noted that energy consumption by Canadian metal miners de­creased by nearly 12 per cent from 1990 to 2011. The Mining
Association of Canada’s Towards Sustainable Mining initiative, whose energy protocol requires all members to develop efficiency targets and publicly
disclose their performance against them, has contributed positively to this.

Nevertheless, energy costs are rising faster than efficiency measures are progressing. From 1999 to 2010, the annual bill for energy required for mining
processes more than doubled, costing Canadian miners $2.2 billion in 2010.

This cost increase can largely be explained by the remote location of many Canadian mines, the lack of regional energy infrastructure, and the resulting
dependence on diesel generation. From 1999 to 2013, the average price of oil increased 10-fold, from roughly US$10 to more than US$100 per barrel.
Heightened transportation costs also increase the price per unit of delivered fuel, pushing the cost of generation for some remote mines up to $0.30/kWh.

With the price of oil forecasted to continue inching upward, miners are giving the benefits of renewable technologies greater consideration. The levelized
cost of electricity (LCOE) for wind, solar photovoltaic, concentrated solar power and some biomass technologies has steadily decreased, enhancing
competitiveness relative to conventional technologies, particularly for off-grid generation. An International Renewable Energy Agency report released in
January noted that the average LCOE for wind, biomass and solar technologies in North America are $0.08 kWh, $0.08 kWh and $0.16 kWh, respectively.

These average prices do not account for additional capital costs associated with remote development. They also vary based on the quality of the renewable
resource. Just as miners need to go where the viable deposits are located, renewable generation is contingent on the strength and reliability of the
renewable asset. This restriction prevents renewable generation from becoming an industry-wide energy solution, no matter how improved the technology is.

But for mines that have access to a viable renewable asset, diversifying energy portfolios with a reliable intermittent power source that simultaneously
offsets their reliance on diesel has benefits that may merit the investment.

Energy security is enhanced by reducing a company’s exposure to oil price spikes. Renewables can also improve a company’s security of supply. Some mines
are dependent on seasonal transportation like winter ice roads for the delivery of essential supplies. The reliability of this seasonal infrastructure is
contingent on a changing climate that can abruptly shorten the supply season, thus closing critical supply links. Offsetting the volume of required fuel
enables companies to adapt to logistical variables beyond their control.

The Diavik diamond mine wind farm project is a good example. Largely dependent on an ice road for resupply, the warm winter of 2006 exposed the remote
mine’s vulnerability to varying climate conditions. The ice road opened late, closed early, and ice thickness did not reach full load capacity, requiring
millions of dollars of supplies – namely diesel – to be flown in at a significant expense.

The construction of four 2.3-megawatt wind turbines is expected to reduce annual diesel consumption by 10 per cent, saving $6 million every year. What is
more, offsetting diesel consumption cuts the mine’s carbon footprint by 6 per cent – equivalent to 12,000 tonnes of carbon dioxide emissions – and
eliminates the need for 100 fuel truck resupply trips each year, reducing supply risk.

With increasing pressure on industry from governments, investors and other stakeholders to operate in a sustainable manner, the environmental benefits
associated with reduced oil consumption such as lower greenhouse gas emissions could assist companies seeking to establish or strengthen their privilege to
operate in communities near mineral deposits. Depending on the jurisdiction, reduced emissions may also support a company’s compliance obligations to a
regional climate scheme.

There is something poetic about finite resources being transformed into sustainable energy solutions. There is the natural synergy between mining and
renewable generation: extracted products are transformed into technology that, having gone full circle, assist mining operations in reducing environmental
footprints and in enhancing efficiency and reliability. While not a one-size-fits-all solution, the economics of renewable energy are improving, and the
associated benefits are attractive for remote miners who can tap into them.

Brendan Marshall is director of economic affairs at MAC. He works to advance the mining industry’s interests and understanding of key economic issues such as taxation, transportation, innovation, international trade and investment, and energy and climate change.